Steel markets painted an interesting picture in May. Chinese steel prices fell in May while US steel prices continued to skyrocket. Let’s explore this unusual divergent between Chinese and U.S. prices.
Chinese Steel Prices Fall
This year we saw an improvement in steel market demand in China thanks to stimulus measures. Also, China, the world’s biggest steel producer, vowed to cut production capacity by 10-15% over the next five years.
This combination boosted sentiment in the steel market and prices in China rose. However, as prices rose, the market questioned whether the price rally would hinder the country’s efforts to tackle that overcapacity problem.
And the market has good reason to have questions. Massive overcapacity in China’s steel industry has yet to shutter. While China’s crude steel output dipped 2.3% in 2015, production rose 0.5% in April compared to the same month last year.
Meanwhile, in May, government officials said that Beijing would continue to urge local governments to push forward steel industry capacity cuts and take reasonable measures to accelerate closures. China says that the capacity that has recovered is regular capacity, and not the one marked for closure. Certainly, If China falters on its commitment to reduce excess steel capacity, we could see that impact global steel markets, including U.S. But so far, unlike Chinese prices, U.S. prices didn’t tumble in May.
US Steel Prices Continue to Rise
The momentum in domestic steel prices continued in May. HRC prices rose by more than 20% just in the past four weeks. U.S. steel buyers will feel the price increase in their budgets this year unless, like our subscribers, they started hedging at lower prices earlier this year.
The price divergence between the U.S. and China comes down to imports. Steel imports into the U.S. were down in April. For the first four months of 2016 total and finished steel imports were down 34% and 33% vs. the same period in 2015. In addition, US steel producers seem reluctant to bring their idled capacity back online despite dried up import supply lines, particularly for flat-rolled steel products.
This combination has left buyers in a short squeeze. Lead times for flat-rolled steel products have risen, allowing U.S. steel companies to raise their base selling prices.
What This Means For Metal Buyers
U.S. steel prices remain strong, but after the huge price gains seen this year, we wonder if, despite strong trade protections, domestic prices will suffer in the second half due to the ongoing global overcapacity issues and the recent correction in iron ore and Chinese steel prices.
Actual Steel Prices
Steel slabs from China decreased in price to $351.04 per metric ton this month from $454.03 per mt in May, a drop of 23%. However, the London Metal Exchange primary cash steel price increased to $104.32/mt this month from $100/mt in May, a bump of 4.32%. Korean pig iron fell from $387.33/mt in May to $344.72/met this month, a drop of 11%.